[House Hearing, 111 Congress]
[From the U.S. Government Printing Office]
U.S.-CHINA RELATIONS: MAXIMIZING THE
EFFECTIVENESS OF THE STRATEGIC AND ECONOMIC DIALOGUE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ASIA, THE PACIFIC AND
THE GLOBAL ENVIRONMENT
OF THE
COMMITTEE ON FOREIGN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 10, 2009
__________
Serial No. 111-43
__________
Printed for the use of the Committee on Foreign Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.foreignaffairs.house.gov/
______
U.S. GOVERNMENT PRINTING OFFICE
52-146PDF WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
COMMITTEE ON FOREIGN AFFAIRS
HOWARD L. BERMAN, California, Chairman
GARY L. ACKERMAN, New York ILEANA ROS-LEHTINEN, Florida
ENI F.H. FALEOMAVAEGA, American CHRISTOPHER H. SMITH, New Jersey
Samoa DAN BURTON, Indiana
DONALD M. PAYNE, New Jersey ELTON GALLEGLY, California
BRAD SHERMAN, California DANA ROHRABACHER, California
ROBERT WEXLER, Florida DONALD A. MANZULLO, Illinois
ELIOT L. ENGEL, New York EDWARD R. ROYCE, California
BILL DELAHUNT, Massachusetts RON PAUL, Texas
GREGORY W. MEEKS, New York JEFF FLAKE, Arizona
DIANE E. WATSON, California MIKE PENCE, Indiana
RUSS CARNAHAN, Missouri JOE WILSON, South Carolina
ALBIO SIRES, New Jersey JOHN BOOZMAN, Arkansas
GERALD E. CONNOLLY, Virginia J. GRESHAM BARRETT, South Carolina
MICHAEL E. McMAHON, New York CONNIE MACK, Florida
JOHN S. TANNER, Tennessee JEFF FORTENBERRY, Nebraska
GENE GREEN, Texas MICHAEL T. McCAUL, Texas
LYNN WOOLSEY, California TED POE, Texas
SHEILA JACKSON LEE, Texas BOB INGLIS, South Carolina
BARBARA LEE, California GUS BILIRAKIS, Florida
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
MIKE ROSS, Arkansas
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
JIM COSTA, California
KEITH ELLISON, Minnesota
GABRIELLE GIFFORDS, Arizona
RON KLEIN, Florida
Richard J. Kessler, Staff Director
Yleem Poblete, Republican Staff Director
------
Subcommittee on Asia, the Pacific and the Global Environment
ENI F.H. FALEOMAVAEGA, American Samoa, Chairman
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
DIANE E. WATSON, California BOB INGLIS, South Carolina
MIKE ROSS, Arkansas DANA ROHRABACHER, California
BRAD SHERMAN, California EDWARD R. ROYCE, California
ELIOT L. ENGEL, New York JEFF FLAKE, Arizona
GREGORY W. MEEKS, New York
Lisa Williams, Subcommittee Staff Director
Daniel Bob, Subcommittee Professional Staff Member
Nien Su, Republican Professional Staff Member
Vili Lei, Staff Associate
C O N T E N T S
----------
Page
WITNESSES
Mr. David Shear, Deputy Assistant Secretary, Bureau of East Asian
and Pacific Affairs, U.S. Department of State.................. 10
Mr. David Loevinger, Executive Secretary and Senior Coordinator
for China Affairs, and the Strategic and Economic Dialogue,
U.S. Department of Treasury.................................... 18
Mr. John Podesta, President and Chief Executive Officer, Center
for American Progress.......................................... 33
Mr. Fred Bergsten, Director, Peterson Institute for International
Economics...................................................... 48
Mr. Randall G. Schriver, Partner, Armitage International, L.C.
(former Deputy Assistant Secretary for East Asian and Pacific
Affairs, U.S. Department of State)............................. 57
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
The Honorable Eni F.H. Faleomavaega, a Representative in Congress
from American Samoa, and Chairman, Subcommittee on Asia, the
Pacific and the Global Environment: Prepared statement......... 5
Mr. David Shear: Prepared statement.............................. 13
Mr. David Loevinger: Prepared statement.......................... 21
Mr. John Podesta: Prepared statement............................. 36
Mr. Fred Bergsten: Prepared statement............................ 51
Mr. Randall G. Schriver: Prepared statement...................... 60
The Honorable Donald A. Manzullo, a Representative in Congress
from the State of Illinois: Prepared statement................. 68
APPENDIX
Hearing notice................................................... 78
Hearing minutes.................................................. 80
The Honorable Diane E. Watson, a Representative in Congress from
the State of California: Prepared statement.................... 81
The Honorable Eni F.H. Faleomavaega: Material submitted for the
record......................................................... 83
Mr. Fred Bergsten: Material submitted for the record............. 101
U.S.-CHINA RELATIONS: MAXIMIZING THE EFFECTIVENESS OF THE STRATEGIC AND
ECONOMIC DIALOGUE
----------
THURSDAY, SEPTEMBER 10, 2009
House of Representatives,
Subcommittee on Asia, the Pacific
and the Global Environment,
Committee on Foreign Affairs,
Washington, DC.
The subcommittee met, pursuant to notice, at 1:09 p.m. in
room 2172, Rayburn House Office Building, Hon. Eni F.H.
Faleomavaega (chairman of the subcommittee) presiding.
Mr. Faleomavaega. The subcommittee hearing will come to
order. This is a hearing by the Foreign Affairs Subcommittee on
Asia, Pacific and the Global Environment. The general theme of
our discussion this afternoon is ``U.S.-China Relations:
Maximizing the Effectiveness of the Strategic and Economic
Dialogue.''
I will get to introducing some of our fantastic witnesses
that we have today for this afternoon's hearing. In place of
our ranking member, the gentleman from Illinois, Mr. Manzullo,
we have one of our senior members of not only the subcommittee,
but the full committee, my good friend, the Congressman from
California, Mr. Rohrabacher, as acting ranking member this
afternoon.
I will begin with my opening statement and then give time
for the ranking member for his opening statement. There may be
other members who will be coming in, and I will give them the
opportunity to do the same. After that I will introduce our
witnesses.
At a bilateral meeting on the sidelines of the G-20
Financial Summit in London in April of this year, President
Obama and Chinese President Hu agreed that the United States
and China would work together to build a positive, cooperative
and comprehensive U.S.-China relationship for the twenty-first
century.
Central to building that relationship would be the United
States-China Strategic and Economic Dialogue, or S&ED, composed
of a strategic track led by Secretary of State Hillary Clinton
and Chinese State Councilor Dai Bingguo and an economic track
led by Secretary of the Treasury Timothy Geithner and Chinese
Vice Premier Wang Qishan.
The S&ED would aim to deepen mutually beneficial
cooperation on a range of bilateral, regional and global
matters from economics, trade and the global financial system
to law enforcement, science and technology, education, culture
and health.
In addition, the S&ED would bring together senior officials
to work cooperatively in settling conflicts and reducing
tensions contributing to regional and global instability,
including the nuclear programs of North Korea and Iran,
problems in Afghanistan and Pakistan and humanitarian issues in
other parts of the world.
Finally, President Obama and President Hu agreed that the
new dialogue would intensify cooperation on energy, the
environment and climate change, with a specific focus on energy
efficiency, renewable and clean energy technologies and the
achievement of a successful international climate change
agreement.
The broad scope of topics to be covered by the S&ED was to
be matched by a wide breadth of participation across government
agencies. The S&ED was thus an expansion of the strategic
economic dialogue initiated by the previous administration and
organized under the Department of the Treasury, which had
focused primarily on economic and environmental matters.
The S&ED would also provide a comprehensive framework for
the more than 50 ongoing United States-China governmental
dialogues and working groups that covered issues ranging from
aviation and nonproliferation to food safety.
The first round of the S&ED was held in July of this year
in Washington, DC, and included senior officials from the State
Department, the Treasury, the White House and 12 other
departments and agencies of the U.S. Government, as well as
senior counterparts from 15 Chinese Government agencies.
President Obama opened the meeting by noting that, and I
quote, ``The relationship between the United States and China
will shape the twenty-first century, which makes it as
important as any bilateral relationship in the world.''
The Chinese clearly viewed the initial meeting of the S&ED
as a great success. In meetings I participated in last month in
Beijing, a number of senior Chinese officials all gave very
positive assessments of the first dialogue. Vice Premier Wang
Qishan said the meeting allowed the two sides to better define
further steps they needed to take in responding to the global
financial crisis. He called it a huge success.
Mr. Wu Bangguo, the chairman of the Standing Committee of
the National People's Congress, noted the unprecedented depth,
scope and representation on the two sides, and said the
positive work of the first S&ED would allow China and the
United States to move forward more effectively on a wide range
of issues.
Our Secretary of State, Hillary Clinton, also pointed to a
number of positive achievements resulting from the S&ED. In her
closing remarks at the Dialogue she noted the United States and
China agreed to promote stability in northeast Asia, resume the
Six-Party Talks and implement U.N. Security Resolution 1874,
address ongoing threats of violent extremism and nuclear
proliferation, encourage Iran to live up to its international
obligations and work toward peace and stability in Afghanistan,
Pakistan and the Middle East.
Secretary Clinton also noted that as a result of the S&ED,
bilateral talks on counterterrorism would be held, military-to-
military relations would be expanded, and progress was made on
a global nuclear summit that President Obama plans to convene
early next year.
In addition, the two countries signed an MOU to enhance
cooperation on climate change, energy and the environment,
which commits both sides to achieving a successful
international climate change agreement, cooperating on
adaptation strategies and developing practical solutions for
both countries.
On the economic track, Secretary Geithner announced
agreement on a framework for cooperation on macroeconomic and
structural policies designed to ensure more balanced and
sustainable global growth, the building of more resilient
financial and regulatory systems, the reaffirmation of the two
countries' commitment to an open, rules-based trade and
investment regime and a pledge to work together in ensuring
that international financial institutions are provided the
necessary tools and resources to respond adequately to
international financial challenges.
Beyond the issues themselves, the Congressional Research
Service notes that the S&ED is one of the few venues in which
the Chinese Ministers interact with one another across
departmental jurisdictions, which is a major benefit. Chinese
Government bureaucracies traditionally have been stove piped,
with little interdepartmental interaction or coordination.
The interdepartmental nature of the S&ED is important as
China's own policy making process has become more complicated
now that the bureaucracy does not speak with a single voice and
the government must take some account of the views of the media
and the public.
Clearly the Strategic and Economic Dialogue covers an
impressive array of issues and challenges, and it now stands at
the very center of the bilateral relationship.
The United States is now the world's largest economy, while
China will soon be second. We are the world's two biggest
trading nations and the two leading emitters of greenhouses
gases. China is the top surplus country, while the United
States, unfortunately, is the largest deficit country. We thus
represent the opposite sides of the global imbalances that
contributed significantly to the worst financial crisis in
generations.
While our two countries may have differences, including a
petty dispute over tire imports from China, I believe that
Washington and Beijing share interests on most of the important
regional and global issues. More to the point, there is no
problem in the world that can be addressed adequately without
bilateral cooperation, whether it be achieving lasting economic
recovery and financial stability or overcoming the substantial
threat of climate change and achieving a clean and secure
energy future. These are the problems we must address
cooperatively.
Fortunately, the bilateral relationship today is in
excellent shape. In my view, the first meeting of the S&ED has
laid the groundwork for the sort of positive, cooperative and
comprehensive relationship both sides seek, and from which both
countries, as well as the region and the whole world, will
benefit.
Maintaining open channels of dialogue between the United
States and China, which the S&ED does, is essential. At the
same time, since the S&ED covers such a wide range of topics
and involves so many government agencies, unless the process is
well managed, it may fail to achieve its promise.
The purpose of today's hearing is to review the results of
the first meeting of the S&ED and to examine how the Dialogue
can best achieve its worthy goals on the many issues that are
currently under discussion between the United States and China.
I would like to turn the time now to my colleague for his
opening statement, Mr. Rohrabacher.
[The prepared statement of Mr. Faleomavaega follows:]
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Mr. Rohrabacher. Thank you very much, Mr. Chairman. Before
I move forward, let me just note that I believe that the people
of China are America's greatest hope for a better world and the
comments that I have about the government that controls them
has nothing to do with the people of China.
The people of China, we need to see those people as our
very important allies against the authoritarian government that
controls them, which I believe that government, the
dictatorship in Beijing, represents the greatest threat to
America and to the western democracy's security and prosperity
in the future.
Mr. Chairman, China is playing a rogue's role in the world.
It has become the ally of criminal governments and criminal
gangs that control various controls on various parts of the
planet, whether we are talking about Burma, whether we are
talking about Sudan, Cambodia or any list of the other rogue
states of the world.
They are all buddies of China, and you will find that the
Chinese are arming their friends and they are robbing the
resources of people like the people of Burma where they are
letting that regime destroy and dissipate the natural resources
in exchange for weapons that are then used to suppress the
people, and the profits from those natural resource rip offs
are going into the pockets of a very corrupt few.
This is a pattern throughout the world, whether it is Sudan
or Cambodia or Burma. It shows that the Chinese Government does
not reflect the values that we would expect from a country that
would have a place that we would talk to them as equals among
nations.
China continues to be the world's greatest human rights
abuser, whether we are talking about suppression of the Uighurs
and this slow motion genocide that the Chinese have put in
place to try to destroy the Uighur nation or whether it is the
people of Tibet, the same slow motion genocide operation
against the people of Tibet.
Or whether we are talking about the Falun Gong who are
still being arrested by the hundreds at times, perhaps at times
by the thousands, and thrown into prison with no due process.
People just disappear and, worse, we find that the prisons
which they are thrown into have an unexplainable source of body
parts and which they are then selling to western buyers.
This ghoulish regime needs to be recognized for what it is
and not be given the status that some people would like to give
it simply because it is powerful and simply because it is a
force to be reckoned with. No, that does not mean you give
someone who runs the government like that, you don't give
gangsters, just because they are powerful, the same respect
that you would pay to democratic nations.
We need to look at China as potentially America's worst
enemy. It is not an enemy today, it is an adversary, but it is
building itself to the point where it could be the most
threatening enemy that we have ever faced.
First of all, when we look at the economic relationship
that has been established with China it has been a disaster for
the people of the United States and a boon for those people who
control the levers of power in Beijing. What we have had is an
unfair trade relationship that we have winked and nodded and
permitted, a partnership between America's corporate elite and
the gangsters that run China for the benefit of our corporate
elite and the benefit of those gangsters, to the detriment of
the American people.
The American people have lost millions upon millions of
jobs, of manufacturing jobs, that have been sent off to China
in order to be done by slave labor by people who have no right
to form a union and people who would be thrown in jail or
murdered if they tried to form a union in the company, not to
mention the environmental things that you have mentioned today.
China, of course, there is no democratic process in which
the people of China will try through their government to limit
the exploitation of the environment, unlike in other democratic
societies, so the gangsters who run that country can simply do
what they please in terms of the environment. We have had a
one-way free trade policy with them, which again has cost us
millions.
We have the theft of American intellectual property rights
on a huge scale being conducted by the Chinese Government. They
are using our own technology to put us out of work and put
America into a position where our safety and security is being
jeopardized. We now see that in the expansion of the Chinese
military and we see that in the expansion of the Chinese
military's insistence on building rockets and missiles which
are demonstrably aimed at taking out America's satellites.
Mr. Chairman, what we need to do is face reality when it
comes to this potential threat and this potential enemy in
Beijing and we must side--we must make sure that the people of
China know that in their endeavors against this tyranny the
American people are on their side and that those corporate
leaders in the United States who have made their alliance do
not represent the values and the policies of the people of the
United States.
Thank you very much.
Mr. Faleomavaega. I just want to make sure that it is
corrected in the record for my good friend from California. You
don't mean small business owners. It is the big, corporate
multinationals that are the ones.
Mr. Rohrabacher. Certainly. If I said small business owners
I meant big, corporate nationals.
Mr. Faleomavaega. Okay. Very good. I thank the gentleman
from California for his statement. This is what makes America
such a beautiful democracy where you can openly dissent or
disagree on any given issues that you want.
Mr. Rohrabacher. Unlike in China where they will throw you
in jail.
Mr. Faleomavaega. I do thank the gentleman nevertheless.
We have two distinguished members representing the
administration at our hearing this afternoon. Mr. David Shear
is currently the deputy assistant secretary for East Asia and
Pacific affairs at the Department of State. He formerly worked
as director of Chinese and Mongolian affairs in the East Asia
and Pacific Affairs Bureau, has been a Foreign Service officer
since 1982, and served in postings in Tokyo, Beijing, Kuala
Lumpur and Sapporo, Japan.
Mr. Shear was also deputy chief of mission at our Embassy
in Kuala Lumpur. He was a minister counselor at our Embassy in
Tokyo and deputy director of Korean affairs. An excellent
gentleman by career. He is fluent in both Chinese and Japanese.
I only wish I could be as well.
We also have with us Mr. David Loevinger. He is currently
the executive secretary and senior coordinator for China
Affairs and the Strategic and Economic Dialogue at the United
States Treasury Department. Previous to that Mr. Loevinger
served as a U.S. minister counselor for financial affairs to
the People's Republic of China.
Also at the Treasury Department, he was the first permanent
representative in China. He was responsible for deepening
United States-China engagement on financial and macroeconomic
issues, including monetary, fiscal and exchange rate policies.
He played a leading role in the establishment of the United
States-China strategic economic dialogue, the precursor of the
current U.S.-China Strategic and Economic Dialogue. This is all
semantics it seems to me. He worked closely with Chinese
regulators to open new markets for United States financial
service firms. The list goes on.
Prior to his service in Beijing the gentleman was also
deputy assistant secretary at the Treasury for Africa, Middle
East and Asia where he advised the Secretary of the Treasury
and other senior Treasury officials on United States policies
regarding the IMF, the World Bank and regional development
banks.
Prior to that position he served as a staff economist,
including also as a special assistant. My gosh. The list goes
on forever on this guy. Mr. Loevinger, we are indeed very happy
that you are able to come and join us. He worked with the IMF
and is a graduate of Dartmouth University. He completed his
master's at Harvard in public policy at the Kennedy School.
Very, very distinguished careers for both of these
gentlemen. I look forward to hearing your testimony. Mr. Shear?
STATEMENT OF MR. DAVID SHEAR, DEPUTY ASSISTANT SECRETARY,
BUREAU OF EAST ASIAN AND PACIFIC AFFAIRS, U.S. DEPARTMENT OF
STATE
Mr. Shear. Thank you very much for the nice introduction,
Mr. Chairman, and thank you, Mr. Rohrabacher, and thank you
also for inviting me today to appear before you to discuss the
first United States-China Strategic and Economic Dialogue held
at the end of July.
I would like to provide an overview of the role of the S&ED
as we call it in our bilateral relations with China, the
primary goals of the first S&ED and the issues discussed in the
S&ED strategic track, which was chaired by Secretary Clinton.
My colleague from the Treasury Department, David Loevinger,
will speak to the economic track, and my colleague from the
State Department Bureau of Oceans, Environment and Science,
Jeff Miotke, will be prepared to take questions regarding the
Memorandum of Understanding (MOU) on climate change discussed
during the S&ED.
The Strategic and Economic Dialogue establishes the
framework for the United States-China relationship under the
Obama administration. We recognize the importance of engaging
China as an important partner in addressing complicated global
challenges, including the recent economic crisis, climate
change and threats to international security. It is critical
that China meets its responsibilities as a global stakeholder
and contributes to the solution to these problems.
The S&ED brings together top United States and Chinese
political and economic leaders to outline opportunities for
cooperation and engage in frank discussions of priorities for
our bilateral relationship. The dialogue enables us to work
together to build trust, strengthen cooperation and resolve our
differences. And we have no illusions about our differences;
all of these activities serve our common interests.
The S&ED is not the beginning of a G-2 structure. Both
countries recognize that we can't solve the world's problems
bilaterally. What the Dialogue does is provide a framework for
the United States and China to deal with these challenges as
responsible global cooperators and open up paths of
communication on global issues of common concern.
We had three primary goals for the first S&ED, all of which
I think we achieved. First, the S&ED served as a prime
opportunity for our senior officials to get to know their
Chinese counterparts, a necessary first meeting that will lay
the foundation for effective cooperation for the next 4 years.
The first dialogue allowed face-to-face interaction among
not only the four co-chairs--Secretary Clinton, Secretary
Geithner, Vice Premier Wang Qishan and State Councilor Dai
Bingguo, but also over 20 officials of cabinet rank from each
side. We held frank discussions on a variety of issues,
including those sensitive to the Chinese such as human rights,
Xinjiang and Tibet.
Secondly, by mobilizing the whole of government on each
side, the S&ED enabled discussions on issues that cut across
agencies, including the full range of economic, regional,
global and environmental challenges
Third, the S&ED set the agenda for our future engagement
with China by giving our senior officials the opportunity to
convey priorities of the Obama administration. The S&ED set the
tone and framework for our major bilateral initiative with
China, including a number of subdialogues.
With regard to the strategic track, it basically consisted
of four areas. We discussed bilateral relations; international
security issues such as nonproliferation and counterterrorism;
global issues, including health, development, energy and global
institutions; and regional security issues in North Korea,
Afghanistan, Pakistan and Iran. Climate change, clean energy
and the environment were addressed in separate special
sessions.
Some of the key highlights of the strategic track include
first, the climate change, energy and environment MOU which
elevates the importance of climate change in our bilateral
relationship.
Second, both sides agreed to enhance efforts in promoting
regional stability. On North Korea, we affirmed the importance
of the Six-Party talks and continuing efforts to achieve
denuclearization of the Korean Peninsula. On Afghanistan and
Pakistan, the two sides pledged to increase coordination to
jointly promote stability and development in the region. On
Sudan, both sides expressed our willingness to increase
coordination and consultation to jointly seek an early and
enduring comprehensive political settlement of the Darfur issue
and promote the north/south peace process.
In discussions on international security issues, both sides
noted their shared opposition to terrorism and agreed to hold
the next counterterrorism subdialogue this week actually,
September 14 and 15. We discussed the upcoming 2010 Nuclear
Nonproliferation Treaty Review Conference and the Conference on
Disarmament and exchanged views on the Global Nuclear Security
Summit proposed by the United States for March of next year.
On other global issues of common concern, both sides agreed
to further dialogue in cooperation on promoting global
sustainable development, including strengthening global
institutions and government, addressing public health
challenges and future discussion of cooperation on poverty
alleviation around the world.
The two sides held frank discussions on human rights.
Secretary Clinton raised U.S. concerns about recent violence in
Xinjiang and discussed ways to enhance mutual understanding and
positive cooperation on human rights issues. Both sides agreed
to reconvene the U.S.-China legal experts dialogue and will
seek to hold the next human rights dialogue before the end of
the year.
We have no illusions about how the Chinese treat their
people. We have a strong interest in improvement of human
rights in China, and we make our views crystal clear--
absolutely clear--to the Chinese at every possible opportunity,
and we took that opportunity during the S&ED to do so this time
around and will do so in the future as well.
On bilateral military-to-military relations, the two sides
welcomed recent improvements in military-to-military relations
and agreed that the two militaries would expand exchanges at
all levels.
Over the next year, U.S. senior officials will take full
advantage of a packed bilateral political calendar to follow
through on S&ED objectives. High level bilateral engagements
over the next few months include the President's visit to
Beijing in November, several energy and environment meetings
leading up to Copenhagen and technical consultations on
counterterrorism and human rights.
The Strategic and Economic Dialogue has created both a
strategic guideline and a catalyst for the United States and
China to address complex global challenges. I would like to
conclude my remarks here, Mr. Chairman, and thank you again for
the opportunity to testify today on this important topic.
[The prepared statement of Mr. Shear follows:]
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Mr. Faleomavaega. Thank you, Mr. Shear.
Mr. Loevinger, for your testimony?
STATEMENT OF MR. DAVID LOEVINGER, EXECUTIVE SECRETARY AND
SENIOR COORDINATOR FOR CHINA AFFAIRS, AND THE STRATEGIC AND
ECONOMIC DIALOGUE, U.S. DEPARTMENT OF TREASURY
Mr. Loevinger. Thank you, Mr. Chairman, Congressman
Rohrabacher. I want to thank you for the invitation to come and
speak to you today about the United States-China Strategic and
Economic Dialogue and more broadly our bilateral economic
relationship.
The S&ED that President Obama and President Hu initiated in
April recognizes that cooperation between China and the United
States is vital not only for the well being and prosperity of
our two nations, but also for the health and stability of the
global economy.
Given that my colleague, David Shear, has talked about the
strategic dialogue, I am going to focus my remarks on the
economic track of the S&ED. The economic track provides a
framework for promoting productive bilateral economic
engagement in core U.S. interests. As Secretary Geithner told
the Chinese at the S&ED, the United States and China may not
always agree on economic issues, but the S&ED provides a
platform for narrowing our differences and reinforcing our
common interests, both bilaterally and in setting the
multilateral economic agenda.
The first meeting of the economic track of the S&ED was one
of the largest delegations from any foreign country in the
history of our foreign relations, involving 12 United States
cabinet officials and agency heads and 15 Chinese ministers,
vice ministers and agency heads. Both sides agreed on a
framework for cooperation on economic issues based on four
pillars: First, promoting a strong recovery and achieving more
sustainable and balanced growth; second, promoting more
resilient, open and market oriented financial systems; third,
strengthening trade and investment; and, fourth, strengthening
the international financial architecture.
On the first item, promoting a strong recovery and
achieving more sustainable and balanced growth, both sides
agreed to undertake macroeconomic and structural policies to
ensure a more sustainable and balanced trajectory of global
growth.
China committed to policies to adjust its demand and
relative prices that will lead to more balanced trade and
growth. To achieve this, it will promote more domestic demand
led growth and pursue policies to increase the share of
consumption in its GDP. It also committed to greater
development of its services sector, which will reduce its
dependence on exports in heavy industry and support its
transition to a greener economy.
Second, we focused on building more resilient and market
oriented financial and regulatory systems. China agreed to a
range of measures, including promoting consumer finance,
allowing foreigners to invest more in China's capital markets,
increasing the number of foreign joint venture securities
companies and allowing foreign banks incorporated in China to
underwrite corporate bonds on China's interbank bond market.
This will not only create market opportunities for United
States financial services firms, but by creating a more
developed and market oriented financial system it will boost
the incomes of Chinese households and contribute to more
consumption led growth.
The two sides also agreed to strengthen their cooperation
on anti-money laundering and countering the financing of
terrorism, and we will continue to encourage the Chinese to
strengthen their efforts to counter the threat of North Korea
and Iran's nuclear weapons programs through their financial
sector.
The third item was strengthening trade and investment, and
the United States and China each reaffirmed their commitment to
open and rules-based trade and investment. China committed to a
range of measures that over time will create new opportunities
for United States firms and workers.
This includes further opening of its services markets to
private investment, decentralizing its foreign investment
reviews, and China also clarified that products produced in
China by foreign invested enterprises will be treated the same
under China's Government procurement regulations as products
produced by Chinese producers. China also agreed to intensify
its effort to join the WTO Government Procurement Code.
Lastly, the United States and China recognized the critical
role that the international financial institutions play in
preventing and responding to crises and ensuring more balanced
global growth. The global economy has changed fundamentally
since the historic gathering of Bretton Woods and so too must
the global architecture that bears its name.
Both sides committed to work together to ensure that the
international financial institutions have the requisite
resources and tools to address today's challenges, and we will
work together with China to ensure China's full engagement and
representation in the design of key multilateral arrangements
and groupings, including the G-20, the Financial Stability
Board and the international financial institutions.
As Mr. Shear said, while the S&ED is going to meet
annually, having agreed on priorities and broad policy
commitments, the word of the S&ED is going to continue
throughout the year. On the economic side we will work closely
with our colleagues at Commerce and USTR on the Joint Committee
on Commerce and Trade and through a range of other deputy level
and staff level groupings.
Throughout the year we intend to consult with and seek the
advice of Congress, including members of this committee and
your staff, U.S. businesses, labor and other groups affected by
United States-China relations. Thank you.
[The prepared statement of Mr. Loevinger follows:]
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Mr. Faleomavaega. Thank you, Mr. Loevinger.
We are joined this afternoon also by one of our
distinguished members, Mr. Inglis. I wanted to ask him if he
has an opening statement he would like to share with us?
All right. We are going to open now with questions, and I
will defer to my good friend, the gentleman from California. At
a later time I will ask my series of questions.
Mr. Rohrabacher. Thank you very much, Mr. Chairman.
Mr. Shear, and I appreciate your addressing my specific
points on human rights in your opening statement, and you
seemed rather adamant about that we are actually serious about
human rights in the complaints we make to China. Can you tell
me what consequences the regime in Beijing suffers?
What have we put forward to say you know, these are human
rights abuses and because you are doing that you are paying
this consequence for it? What have we offered them as a
suggestion that we really are serious about it rather than just
using words?
Mr. Shear. Thank you, Congressman. We made it clear to the
Chinese that, for example, in the case with regard to religious
freedom that all modern, civilized countries implement
religious freedom vigorously and that countries that do not
suffer in terms of openness and the vitality of their society
and their economies as well.
We have made it clear to the Chinese that the restriction
of information on the internet, for example, not only results
in a society which is less well informed, but in an economy
that is less efficient.
Mr. Rohrabacher. But we haven't said there is no direct
correlation between the Chinese regime continuing to commit
these human rights abuses and any specific policy of the United
States Government. There is no correlation there at all. Is
that correct?
Mr. Shear. My understanding, Congressman, is that, for
example, the Chinese still remain under the Tiananmen Sanctions
Act, which limits a variety of exchanges with the Chinese,
including some exports of United States law enforcement
equipment and commercial space cooperation as well, so in that
regard the Chinese have seen some consequences with regard to
their treatment of human rights.
On the general question----
Mr. Rohrabacher. Right.
Mr. Shear [continuing]. We are very strong in making
representations on these subjects to the Chinese. I think that
we have achieved some successes.
Mr. Rohrabacher. Pardon me. I only have a very short period
of time to ask questions, and I have to go to----
Mr. Shear. Understood.
Mr. Rohrabacher. I would suggest that talking strong and
not following up with a specific consequence has exactly the
opposite impact that diplomats would like us to believe.
Unless there is something that backs up somebody's words,
if we continue to talk tough but there are no further
consequences other than what happened right after Tiananmen
Square and at the same time Americans are stumbling over
themselves to invest capital in and build an economy in China,
don't you think that basically gives the Chinese the opposite
impression that really Americans are just using a bunch of
words when in reality all they care about is making money?
Mr. Shear. We don't let up on the Chinese on human rights
issues, Congressman. The Chinese understand very clearly what
we think on these issues, and I think our exchanges with them
on this subject have had positive effects.
I think Chinese rule of law has improved over the past
several decades. They have a long way to go in this regard.
Mr. Rohrabacher. Right. Are there any opposition parties in
China?
Mr. Shear. There are no legitimate opposition parties.
Mr. Rohrabacher. Is there a free press in China?
Mr. Shear. The press is highly restricted.
Mr. Rohrabacher. Okay. Is the Falun Gong free to have their
organization without having their members thrown in jail?
Mr. Shear. No, it is not.
Mr. Rohrabacher. All right. So I don't think we have seen
very much, and yet at the same time we have seen massive
increases and exchanges of money, of people investing money
from the United States in building a manufacturing base which
puts our people out of work and enriches that regime. That is
kind of a bigger message than all the words we can use.
Let me ask you about that. The President last night said
that we have been losing 750,000 jobs a month in our current
economic situation. How many of those jobs have been going to
China?
Mr. Shear. I can't answer that question, Congressman, but I
know that the $73 billion in exports we sent to China last year
also accounted for thousands of American jobs.
Mr. Rohrabacher. Sure. And what was the offset there? It
was $73 billion or $43 billion we are exporting, and how much
is it we importing?
Mr. Shear. I think we imported $256 billion in Chinese
goods last year.
Mr. Rohrabacher. All right. And you think that didn't cost
any American jobs? Well, I think that we could suggest that.
Why is it that they have gotten away with that so long? Why
is it that for so long we have had a one-way free trade policy
that has permitted, from what you just described, a five to one
ratio--it may be even more than that--of exports or imports to
exports?
Mr. Shear. Just a general point, Congressman, and then I
would like to turn the microphone over to Mr. Loevinger, but
this administration is committed to doing everything we can to
foster American industry and help the American worker.
We have taken action both within the WTO and bilaterally on
trade issues with China, and, as I say, we have had some
successes.
Mr. Rohrabacher. You will have my support at that point. My
last question----
Mr. Faleomavaega. Will the gentleman yield?
Mr. Rohrabacher. Certainly.
Mr. Faleomavaega. I recall that it was in 2007 China
exported to the United States over $340 billion worth of goods.
And I am curious. Mr. Loevinger will help us. Out of those
goods that were manufactured in China, how many United States
multinationals were involved in the manufacturing process in
terms of the number of jobs that were sent overseas, sponsored
heavily by our own multinationals?
I am curious. Of that $340 billion of Chinese imports, how
much was that percentage produced by our own American corporate
entities that are doing business in China because of cheap
labor and all this other stuff that comes with it?
Mr. Loevinger. Thank you, Mr. Chairman. Roughly about 60
percent of China's exports are produced by multinational
corporations. My impression is the biggest foreign investors
are from Taiwan, Japan and Korea, but also the United States is
a very important foreign investor in China.
But more broadly to the point you made and the point that
Congressman Rohrabacher made, we are concerned about these very
big trade imbalances, and this was the focus of the economic
track of the S&ED. The message to China is that its growth
model is going to have to change because there are changes
going on in the United States.
U.S. households are changing their savings behavior--we
have seen savings going up--and that if China wants to grow it
is not going to be able to depend on the United States consumer
in the way it has in the past. It is going to have to produce
its own home grown growth model. Very simply, China is going to
have to consume more and save less because the United States
consumer is saving more.
So how are we going to bring that about? The S&ED talked
about, and it wasn't just talk. We got commitments from China
over the course of the next several years. That was our intent
going in was to build a framework for engagement for the rest
of the administration on ways China can bring down its very
large trade imbalances.
The exchange rate is an important part of that equation,
and we had serious and frank discussions on the exchange rate,
but the exchange rate is only one tool. We also talked about
things China can do in the financial sector creating what we
call a social safety net.
China has to establish its own health care reform, its own
unemployment insurance, its own way of financing education so
Chinese households feel more secure so they can save less and
consume more.
Mr. Rohrabacher. I am very happy to hear that we have had
so much talk, and I would hope that the administration, unlike
the past administration and the administration before that and
the administration before that who also talked about many of
the very same issues, will decide to do something specific in
which the Chinese will feel a consequence if they are not, for
example, giving us the type of reform on currency reform that
we are talking about and the same type of trade restrictions
that we face and they themselves are engaged, the government
itself is engaged.
Let me ask that as a basic question. Is not the Chinese
Government engaged in a great effort in the United States to
steal American technology? We are talking about espionage,
economic espionage. I mean, I understand there have been about
50 such situations in the last few years that we have uncovered
from China where you have----
Mr. Faleomavaega. The gentleman has one more question.
Mr. Rohrabacher. Am I incorrect in that?
Mr. Loevinger. Okay. What I can tell you is we had frank
discussions. There are policies that we have concerns about in
China. There are issues that the Chinese raise with us.
They think our export control policies are too tough. They
think our Sisyphus process is too tough, and we were very frank
with them that in Sisyphus we are going to protect our national
security. In our export control policies that are implemented
both by the Commerce Department and by the State Department we
are going to ensure that militarily critical technologies and
dual use technologies are protected.
Mr. Rohrabacher. Well, to the degree that you guys are
doing that more than talking you will have my support. I wish
you luck, and we will be watching real closely, won't we, Mr.
Chairman?
Mr. Faleomavaega. Yes. I find it somewhat ironic that here
we have a country that is basically Socialist Marxist ideology
in applying free market systems since Deng Xiaoping made that
announcement in 1978, and yet somehow they do a better job in
working their economy in a free market system when we are
supposed to be the better ones to understand how capitalism,
how a free market, should work in such a way that we find
ourselves in a worse situation than the Chinese.
Am I missing something here? Because it seems that the
Chinese are telling us how to properly implement a free market
system because, apparently, despite all this world crisis,
economic crisis, China's economy seems to be the most stable.
Yet it is a not a capitalistic society. Could you help me
reconcile this irony?
Mr. Loevinger. I would be happy to. Without a doubt the
growth that China has achieved since Deng Xiaoping instituted
the reforms 30 years ago has been one of the most notable
economic success stories in history. Without a doubt, the
Chinese people, their lot has been improving. More people now
are richer in China than they have ever been.
At the same time, I respectfully disagree that I don't
think when you compare the United States to China we have to
give anything to the Chinese. The big imbalances we see in
China are as much an indication of their weaknesses that
Chinese households can't consume. They feel they have to save
because they don't have the whole set of systems that we have
set up in the U.S.
Mr. Faleomavaega. What I meant, Mr. Loevinger, is that I am
not an economist, but the financial crisis that we find
ourselves in, something happened on Wall Street. The
derivatives and all this came about, lack of regulatory
authority on the part of government to enforce what was
supposed to be to keep an eye on greed, if that is a better way
of saying it. I suppose the extreme of capitalism, you become
greedy and you forget the rules and that is how we ended up
where we are.
Now, I may be wrong in my laymen's terms of defining that.
I mean, you have to give some credit to the Chinese for their
success in doing whatever they have done in making their
economy now second or near second now only to our economy, so
that is what I am trying to say here.
They seem to have done a better job in not only controlling
the economic situation with the annual growth rate now at 8
percent, and we are suffering right now in terms of all the
jobs lost, the recession and all of that, so I was just trying
to dig into that.
Mr. Loevinger. Yes. Let me make three quick points.
Mr. Faleomavaega. Yes.
Mr. Loevinger. Obviously a lot of mistakes were made in the
U.S. and Secretary Geithner is going to work very closely with
Congress on reforming our financial supervision and regulation
to make sure those mistakes don't happen again.
Secondly, China did not have the financial crisis, but part
of the reason is China's financial sector is much less
developed than ours, and that has its own problems for Chinese
households. It is much harder to go to a store and pay with a
credit card. It is much harder to get a loan to buy a home or
finance schooling in China than it is in the United States.
Mr. Faleomavaega. I think that is understandable. I think
our overall GDP right now is about $19 trillion to China's
what, $3 trillion or $4 trillion, so understandably, our
economy is still number one in the world.
On the S&ED, it sounded more like a G-2 that we are taking
all the world's issues it seems. Are you sensing any sense of
resentment maybe from some of our closest allies? Do they ask,
``How come we are not part of the team?''
Is there a sense of exclusivity involved here where now
only China and the United States are solving the world's
problems and without consultations with our allies or the other
forums that may have similar problems?
Are we taking too much into this or are we streamlining it
better, defining our priorities? Not just for China. We are
talking about regional issues. We are talking about world
issues. Shouldn't others also be active participants in the
process?
Mr. Shear. Mr. Chairman?
Mr. Faleomavaega. Mr. Shear?
Mr. Shear. Secretary Clinton has said that we are not in a
multipolar world now; we are in a multipartner world. And
China, as one of the world's great powers, one of the world's
great trading nations, is one of those essential partners in
our efforts to address issues like climate and the global
financial crisis.
But it is not the only partner. We will be working together
closely particularly with our allies in Europe and in East Asia
to address these issues as well. In East Asia we will be
working closely with our Japanese, our South Korean and our
other allies, particularly as the new Japanese Government comes
in.
We will be consulting with them closely. We will be
cooperating with them intensively, and we will be keeping them
fully informed of what we are doing with our other partners,
including China.
Mr. Faleomavaega. I was in Korea recently, and I noticed
with interest the fact that there is no other country that has
more influence on the situation in North Korea than China.
There is no other country in the world that has more influence
on the situation in South Korea than the United States.
So my question: Where does it say in the Bible that there
must be Six-Party Talks? Why not just China and the United
States and two Koreas? Where does Russia have an interest in
the process? Japan now is introducing a collateral issue that
has nothing to do with denuclearization, which to me kind of
puts a puncture there on the process of Six-Party Talks. Do you
care to comment on that?
Mr. Shear. All members of the Six-Party Talks----
Mr. Faleomavaega. And by the way, how do you denuclearize a
country that already has in its possession 10 nuclear bombs
like North Korea? Did we do that to Pakistan? Did we do that to
India? Why are we singling out North Korea to denuclearize when
it already has the nuclear bomb, may I ask?
Mr. Shear. On your first question with regard to Six-Party
Talks, we think that all parties with a vital interest in peace
and stability and denuclearization on the Korean Peninsula
should be involved in this process. The six parties are the
countries closest to the Korean Peninsula and with the
strongest interest in these issues.
I think we have worked closely through the Six-Party
process. We want the Six-Party process to continue. The Chinese
do as well. The Chinese have a variety of interests on the
Korean Peninsula, including the denuclearization of North
Korea, but also including stability and avoiding a large flow
of North Korean refugees across the border.
We have addressed all these issues within the context of
the Six-Party process. We hope the North Koreans will come back
to the Six-Party table as soon as possible as we rigorously
implement the sanctions under Security Council Resolution 1874.
Mr. Faleomavaega. My apologies. My time is up.
Mr. Royce?
Mr. Royce. Thank you, Mr. Chairman. Let us stick on that
issue for a minute with respect to North Korea because China is
North Korea's gateway to the outside world, right? I mean,
China props up North Korea. That is the reality.
Now, you say that China recognizes the latest U.N. Security
Council resolution. I am trying to figure out what that means.
Does that mean that China is giving us adequate assistance on
North Korean financial activity? Because it doesn't look that
way.
Mr. Shear. I will defer to Mr. Loevinger on the subject of
financial activity, but in general terms China worked with us
in the Security Council to produce one of the strongest
sanctions resolutions on North Korea yet. That is the result of
lengthy cooperation and consultation with the Chinese within
the Security Council on a succession of Security Council
resolutions on this subject.
With regard to implementation, we have consulted closely
with the Chinese on this. We have urged them to implement the
sanctions vigorously. I think the Chinese have done that, and
we are working with them on other measures they can take.
Mr. Royce. They are with us right up to pulling back on
economic support and propping up North Korea.
Mr. Shear. The Chinese have restricted energy to North
Korea in the past.
Mr. Royce. But for very short periods of time, and we had
some success for a very short period of time in terms of the
Banco Delta Asia. That was an example of how you get North
Korea's attention, but that requires the cooperation of China.
The only point I am going to make is that your report was
light in terms of how we have tried to leverage China on North
Korea. What I would suggest to you is you spent a lot of time
on these issues with China, a whole host of them. I think we
are missing the big picture right now, which is proliferation.
Once it reaches the Euphrates River and North Korea is building
reactors in Syria we have a proliferation problem. China is
sort of the linchpin of this.
But that takes me to another concern that I have, and I
will go to David's testimony here. Mr. Loevinger, you said in
your testimony that China and the United States each reaffirmed
their commitment to open and rule-based trade in investment.
That seems to me a stretch because I don't see China--I can see
them reaffirming its commitment. I just don't see any practice
of it.
One of the reasons I say that, I am from California and
have met with many Chinese, Vietnamese-American, American
investors, people all over the map who are trying to do
business in China, and it is always the same story about
corruption.
So after so many of these cases and reading so many of them
in the press as well, it is clear that American investors get
used and abused in China and you have officially sanctioned
corruption there. So what is the United States going to do
about that? We have got American investors basically being
pinatas, you know, and Chinese corruption just takes a whack at
them.
And what is more bothersome is that the U.S. Government,
more specifically, the Commerce Department, very deceptively
promotes China. I can't tell you how many complaints I get from
investors. So you go to one of the many conferences they hold,
and you would think China was nirvana as they pitch this, an
investor's paradise. That it is ripe for the picking.
These conferences are a real shame because they give
disinformation, and our commercial advocacy at the embassies
and the consulates, which are then absolutely necessary once
anybody invests, that is very, very feeble. For those of us who
have worked on constituents' cases to try to get any justice
done, you and I know there is no justice in that system.
So I would like to hear from you what this trade and
investment dialogue was like with the Chinese, given the fact
that some of us know what the process is really like for those
involved in trade and investment. You know, did it deal with
the reality that thousands of American investors are getting
wronged in China, or was it just happy talk, or what happened
during that dialogue?
Mr. Loevinger. Thank you, Congressman Royce. Frankly, you
bring up a lot of good points.
I just spent 3\1/2\ years at the embassy in Beijing, and
every week I heard from U.S. companies, a lot of U.S. financial
services firms, talking about how tough it is to do business,
so I can tell you it is no nirvana. On the other hand, frankly,
as you guys mentioned, there is a lot of United States
investment going into China because even though it is not a
nirvana businesses are making money and they are growing their
business.
When we say we want to promote rule-based investment in
trade and we want a Chinese commitment to rule-based investment
in trade, we are going to start with the WTO. You have seen
this administration and the previous administration bring
several WTO cases to China, and we have won several WTO cases
and we are going to continue to bring cases to the WTO when
China is not adhering to its commitment.
Secondly, we want to expand the international commitments
on trading investment that China is part of, so we spent a lot
of time talking about the WTO government procurement agreement
and how it didn't matter in the 1980s when the agreement was
signed whether China was in or out because who cared because
China was a small purchaser and a small supplier. Now it
matters a lot.
And we also talked about when the administration finishes
its review of policies toward bilateral investment treaties
moving forward on a bilateral investment treaty with China
again to put our trade and investment relations under more of a
rule-based framework.
Mr. Royce. Thank you, Mr. Chairman.
Mr. Faleomavaega. Thank you. I wondered if the gentleman
from California desires to do a second round. We have another
panel pending.
Mr. Rohrabacher. No.
Mr. Faleomavaega. Okay. I do want to say thank you both,
gentlemen, for coming. My subcommittee looks forward to working
with you both in the coming weeks and months as we try to
unravel a lot of the fundamental issues affecting the Asia-
Pacific region, over which it has jurisdiction. I sincerely
want to thank you both for being here this afternoon.
Mr. Shear. Thank you, Mr. Chairman.
Mr. Faleomavaega. Thank you.
We have in our next panel my dear friend, a distinguished
gentleman in his own right, Mr. John Podesta. Here with us also
are Mr. Fred Bergsten and Mr. Randall Schriver.
Mr. Podesta is currently president and CEO of the Center
for American Progress. Under his leadership, the Center has
become a notable leader in development of and advocacy for
progressive policies. In 2003, Mr. Podesta served as White
House chief of staff to President Bill Clinton and served on
the President's Cabinet and was a principal on the National
Security Council. While in the White House, he also served as
both assistant to the President and deputy chief of staff.
Recently, Mr. Podesta served as co-chair of President
Obama's transition team, where he coordinated the priorities of
the incoming administration, oversaw the development of policy
and spearheaded the appointment of major Cabinet secretaries.
Additionally, he has held numerous positions on Capitol
Hill as an aide to the former Democratic leader, Senator Thomas
Daschle, and as counsel to the Senate Agriculture Committee and
Judiciary Committee.
A Chicago native and a graduate of Knox College and
Georgetown Law School, he currently is a visiting professor of
law, authored several books, and the list goes on and on. John,
welcome. Very glad to have you.
Mr. Podesta. Thank you, Mr. Chairman.
Mr. Faleomavaega. Dr. Fred Bergsten is currently the
director of the Peterson Institute of International Economics,
formerly known as the Institute for International Economics in
its creation in 1981. The Institute is the only major research
institution in the United States devoted solely to
international economic issues.
It has been called the most influential think tank on the
planet. The first comprehensive survey of some 5,465 think
tanks around the world recently concluded that the Peterson
Institute was tied for top-rated think tank in the world with
the Brookings Institution, I understand. It has a staff of
about 60 and has moved to an award winning new building right
now. Dr. Bergsten was the most widely quoted think tank
economist in the world in 1997 and 2005, and his tremendous
work continues on.
Also he was assistant secretary for international affairs
at the U.S. Department of Treasury from 1977 to 1981, also as a
major economic assistant to Dr. Henry Kissinger at the National
Security Council. Dr. Bergsten has authored, co-authored and
edited over 40 books and hundreds of articles. My gosh, the
list goes on and on. I could spend the whole day here listening
to this gentleman.
Dr. Bergsten received his doctorate and his master's from
the Fletcher School of Law and Diplomacy and graduated magna
cum laude from Central Methodist College. He has contributed
tremendously to U.S. and international economic policy,
analyses of a wide range of global economic issues, and
provided a vision for a G-2, now known as the Strategic and
Economic Dialogue.
Mr. Randall Schriver is one of the founding partners of
Armitage International, a consulting firm that specializes in
international business development and strategies. Mr. Schriver
served as deputy assistant secretary of State for East Asia and
Pacific affairs where he was responsible for the People's
Republic of China, Taiwan, Mongolia, Hong Kong, Australia, New
Zealand and the Pacific Islands.
Prior to that, he served as chief of staff and policy
advisor to then Deputy Secretary of State Richard Armitage. He
formerly served for 4 years in the Office of the Secretary of
Defense, was an active Naval intelligence officer for 3 years,
foreign policy advisor on the McCain Campaign for President
last year and was on the Bush-Cheney defense transition team.
Mr. Schriver has won numerous military and civilian awards.
He hails from the state of Oregon. He holds a master's degree
from Harvard and a bachelor's from Williams College.
Gentlemen, this committee is truly honored to have all
three of you for taking your precious time to come and testify
before the subcommittee on this issue, which I think is very,
very important not only to me, but also to my colleagues on the
Foreign Affairs Committee.
I would like to start with Mr. Podesta, if you would, and
see where we can go from there.
STATEMENT OF MR. JOHN PODESTA, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CENTER FOR AMERICAN PROGRESS
Mr. Podesta. Thank you, Mr. Chairman. You have an extensive
written statement, so let me try to summarize.
Mr. Faleomavaega. Without objection. All your statements
will be made part of the record, as well as any other materials
you want to add.
Mr. Podesta. I will just try to hit some key points. I am
honored to be here with you, Mr. Chairman, Mr. Rohrabacher. I
just returned from China where I led a high level delegation
that included former leader of the Senate, Tom Daschle, John
Deutch and former Ambassador Wendy Sherman, and I just came
back last week so my observations are at least fresh, if not
accurate, but they are at least fresh.
Our conversations with very senior members of the Chinese
Government convinced me that the relations between China and
the United States are on a solid footing. For example, State
Councilor Dai Bingguo told us that the government hoped
President Obama's visit in November would rival the
significance of President Nixon's visit and introduce an era in
which the United States and China could build a positive,
cooperative and comprehensive relationship, which you quoted in
your opening statement, Mr. Chairman.
Look, I am not naive about China. I understand the human
rights issues, the issues around support for states like Sudan
and Burma, but I think that we don't have the luxury of either
ignoring or not getting along with China at this moment in
history.
We have pressing global challenges that need to be
addressed with China, so I think it is time to move beyond what
has been usually referred to as engaging in hedge framework of
China policy and take an approach that is openly premised on a
strategy that maximizes opportunity and tries to manage the
risk.
The new format of the Strategic and Economic Dialogue will
be instrumental to shaping our relationships going forward, as
well as making progress on a number of global challenges. I
thought I might comment based on again our conversations
recently in China on some aspects of the national security
relationship and then talk a little bit about climate change
and clean energy.
On North Korea, you may know, Mr Chairman, I recently
accompanied President Clinton to Pyongyang, making me I guess
one of the few Americans who have been there in recent years,
and our discussion in Beijing I think suggests that China
remains committed to a denuclearized Korean Peninsula, and they
will work to reengage the DPRK in multiparty communications.
China's recent enforcement, as Mr. Royce was suggesting, of
U.N. sanctions against Pyongyang I think is actually an
encouraging sign of their position. They view this as a
strategic I think threat in the region, and I think they are
being cooperative on that question.
On Iran, China has acknowledged that Iran should not
possess nuclear capabilities, but it has declined to use its
leverage on the issue. The United States Government I think
needs to continue to press China on Iran, given our mutual
interest in avoiding a regional arms race and promoting long-
term stability. I think in that regard, the Chinese
investments, particularly with respect to developing the
Iranian capacity to develop gasoline, I think are troubling. I
think we need to keep pressing on that front.
With respect to military cooperation, we met with General
Ma, who is the vice chairman of their Joint Chiefs. Cooperation
and confidence between China and the United States militaries I
think has lagged behind that of other state apparatuses. I
think both sides view this as being marked by a kind of stop/
start/restart quality that has not always been helpful to
either side.
I think both sides actually, both the United States
military and the Chinese military, are looking to bring
cooperation and confidence to levels consistent with other
areas of the United States-China relations, and senior leaders
of our two militaries need to continue to engage in regular and
candid dialogue on issues of mutual concern.
The resumption of our formal bilateral defense dialogue is
an important first step, and there are a number of other
activities I think that could follow on. For example, our ships
are battling pirates side-by-side right now off the coast of
Somalia, and I think that is symbolic of the way we can develop
a stronger mil-to-mil relationship.
We also discussed pandemics. I think China learned its
lesson from SARS and are actively cooperating with the World
Health Organization particularly with respect to H1N1. While
they have made some mistakes in that regard, I think they are
basically in a cooperative mode and a positive mode.
Let me just say a word about climate change. During our
meetings in Beijing, we were assured that China will do its
part with respect to addressing its skyrocketing emissions
rates. As my testimony goes over, they have very, very
significant investments in clean energy, very major investments
in solar and wind, developing the clean energy technologies and
industries of the future. I think they will be a competitive
player in that regard. In fact, I think we are at risk of
falling behind.
The MOU that was referenced in the first panel I think is a
significant movement whereby we can begin to understand and
move forward to demonstrate that their energy policy will
indeed result in emissions reductions capabilities in a
measurable, reportable and verifiable way, so I think it is a
very important part of the Dialogue and has been made central
under this administration to the Dialogue.
We, along with the Asia Society, have developed a kind of
road map on how we can cooperate on CCS, carbon capture and
sequestration, which I think they are quite interested in, our
own Government is quite interested in, and it may be a way of
carrying out demonstration of that vital technology to both
countries in a way that is cost effective and will result in
reduced emissions again in both countries.
My time is up, and I will turn back the microphone.
[The prepared statement of Mr. Podesta follows:]
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Mr. Faleomavaega. Thank you, Mr. Podesta.
Dr. Bergsten?
STATEMENT OF MR. FRED BERGSTEN, DIRECTOR, PETERSON INSTITUTE
FOR INTERNATIONAL ECONOMICS
Mr. Bergsten. Thank you, Mr. Chairman. I appreciate the
opportunity to testify. I will make five basic points and try
to do so quickly.
First, as you have already indicated, the United States and
China are clearly the two most important national economies in
the world. It is therefore clear that effective international
policy coordination requires the closest possible cooperation
between the United States and China.
The two countries do not have to agree on every issue, let
alone pursue identical policies, but they must be willing and
able to work constructively together if enough agreement is to
ensue to permit progress across the entire range of crucial
international issues ranging from recovery from the current
crisis to creating a new global regime to counter global
warming.
The punch line of that dual leadership is that the United
States-China relationship must focus increasingly in the future
on the wide range of global economic issues rather than the
narrow bilateral frictions that we have traditionally
emphasized in the past.
Second, in anticipation of those conditions, and as you
indicated, I proposed 5 years ago that the United States and
China work toward creating an informal G-2 that could provide
effective leadership of the world economy. The idea is to
develop a close working relationship that would supplement, not
supplant, the other Gs--G-7, G-20--and the IMF and WTO.
Somebody mentioned that other countries are miffed that the
United States and China might be working on these issues
together. If the U.S. plays it right, all the other countries
will be consolidated and engaged too, and if the United States
and China can agree, and they have to agree to make progress,
the outcomes will be superior and the other countries ought to
welcome it. The idea is not to supplant but to supplement and
make the system work better. And without these two, whether we
like it or not, there has to be agreement or we won't get much
progress.
My assessment of the initial meeting of the Strategic and
Economic Dialogue and its future prospects is governed largely
by an assessment of whether it is helping to create such a G-2.
I think it is moving clearly in that direction, despite the
denials of the Secretary of State earlier on, and holds
considerable promise for so doing. I thus strongly endorse the
initiative, praise the Chinese for participating so actively in
it, and offer a few suggestions for how it can best proceed.
Third, to create and sustain an effective G-2, and to have
an S&ED that works, the United States and China have to engage
in a wide ranging and continuing conversation on their
respective roles in the world economy and the global economic
system.
As you mentioned, Mr. Chairman, they weren't even in it
until 30 years ago. The whole system was created before they
were even engaged. They were not present at the creation. They
had nothing to do with the rules and institutions. So it is not
a shock that as they become the second largest economy in the
world they might raise some questions about what they are
getting into.
Therefore, we have to talk with them very seriously on
world views about the global economy, the same way my old boss,
Henry Kissinger, and President Nixon talked to Zhou Enlai and
Mao Zedong back almost 30 years ago in opening up the United
States-China relationship. And in a way that is even more
important in the economic sphere because, as I say, they
weren't involved in the system when it was created and
developed, yet it is critically important to bring them into
it.
So that would be point 3. The S&ED, by providing a full day
or two of intensive interaction between key ministers of the
two countries, can and should play an active role in that
process.
Point 4. Heads of government and top officials will become
impatient with lengthy discussions of world views and such
unless there are some deliverables on issues of immediate
concern. And I think it is therefore imperative the S&ED tackle
the media topics. There are at least two issues where I think
they did so effectively, and you heard about it early from the
government representatives.
On the world economy, China and the United States have led
the global recovery with fiscal and monetary stimulus. China in
fact grew at an annual rate of 15 percent in the second quarter
of this year, clearly was the first country to recover, clearly
is leading the global recovery. The U.S. has not bottomed out.
Our recovery has probably begun, and so I think we are on the
way to a joint leadership of the recovery process.
What is critically important, however, and David Loevinger
from Treasury emphasized it, is not only recovery of growth,
but reshaping the composition of that growth and therefore the
direction of both countries' strategies. China has been running
huge, and in my view, unacceptable and unsustainably large
trade surpluses, over 10 percent of its GDP. They have
manipulated the exchange rate.
Mr. Rohrabacher didn't even mention that one, which I think
is the most important problem. The Chinese have manipulated
their exchange rate aggressively and massively. That has given
them a huge competitive advantage and built up these trade
surpluses. That just can't continue.
As Loevinger said, you have to put that in the context of a
restructured growth strategy. Already, and this is not widely
realized, China's trade surplus this year will be cut in half
from where it was just 2 years ago.
The U.S. trade deficit is already cut in half from where it
was 3 years ago so there is good progress, but the issue is to
keep that going, build on it, use the S&ED and other devices in
order to restructure the growth pattern in the way that
Loevinger was discussing. I can elaborate on that if you wish.
The other big issue is global warming, and I do believe
that this Memorandum of Understanding, which was the most
tangible result from this S&ED meeting 6 weeks ago, could turn
out to be a breakthrough in terms of United States-China
cooperation and China's commitment to deal with that global
problem.
Fifth and finally, there are some things they did not do
and have to do in the future. China has expressed great anxiety
about its dollar holdings. Well, they didn't really talk about
that. The United States is very concerned, rightly, about a
seeming revival of industrial policy initiatives in China. I am
not aware that they talked about that very much either, and the
Chinese have this very aggressive policy of keeping the
exchange rate undervalued. That boosts their trade surpluses
and enhances their competitiveness unfairly.
Loevinger said they had long talks about it, but the truth
is both Treasury and the IMF have backed away from any
effective counter to that Chinese policy, which is very adverse
not just to our economic interest, but to the stability of the
whole global system.
So I think the S&ED is a good step down the line toward a
G-2 to talk about global issues, and they made good progress on
two of the big ones. But there are several others that remain
to be addressed so they have a big agenda for the future that I
hope they will continue to address.
[The prepared statement of Mr. Bergsten follows:]
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Mr. Faleomavaega. Thank you very much, Dr. Bergsten.
Mr. Schriver?
STATEMENT OF MR. RANDALL G. SCHRIVER, PARTNER, ARMITAGE
INTERNATIONAL, L.C. (FORMER DEPUTY ASSISTANT SECRETARY FOR EAST
ASIAN AND PACIFIC AFFAIRS, U.S. DEPARTMENT OF STATE)
Mr. Schriver. Thank you very much, Mr. Chairman. Thank you
for the invitation and thank you also for seating me along side
people I respect and admire so much. I know we are somewhat
judged by the company we keep, and I know my reputation is
enhanced today. Thank you for giving me that opportunity.
Talking about a particular format or dialogue, I think it
is important that we ground this in our impressions of the
overall relationship because even the best modalities won't
produce results if the fundamentals aren't there in the
relationship. And the reverse is true as well. If the
fundamentals are in place the form of dialogue will only
marginally affect the outcomes.
I guess I would take a bit more of I don't want to be
pessimistic, but maybe in my view at least a sober minded view
of where things stand. I think although it is undeniable that
our interests are converging in many ways, there are still very
profound differences between the United States and China. Many
of those issues have already been mentioned--human rights, the
security of Taiwan, proliferation and so forth.
So I think even if we are extremely creative and come up
with the best modalities, I think these profound differences
will mean that the outcomes and the deliverables and the
products I think will necessarily be modest, and I think that
was frankly borne out in the first round of the S&ED. That
doesn't mean the Dialogue shouldn't take place, but we should
think carefully about how we characterize this dialogue and
what our expectations are.
In fact, when the Chinese raised the prospects of holding a
strategic dialogue, my boss at the time, then Deputy Secretary
Armitage, agreed to a senior dialogue only. He said we reserve
strategic dialogue for allies and people who share our views
and share our interests, and I think that is an important point
to keep in mind.
I think many of the advantages of this forum have already
been discussed. I would underscore several of them. I do think
it is useful to the interagencies on both sides. People have
noted the Chinese interagencies are stove piped. I might hasten
to add that is a problem on our side as well at times, and this
format with so many cross-cutting issues does help
interagencies on both sides interact and deal constructively on
a range of these issues.
Obviously having a flagship dialogue of this magnitude can
be an important action forcing event that can incentivize
governments into action, and obviously having a format of this
nature when things are said they are almost by definition
authentic, authoritative and it is a great platform for
communicating clear messages.
I think between the United States and China that single
goal of clear communication to the extent it helps us avoid
differences and conflicts and miscommunications, that in and of
itself is important, but let me focus on what I think are a few
of the potential downsides, and I do so at the risk of sounding
overly negative, but I want to use the time to be constructive
and talk about what I think some of the potential pitfalls are.
Number one, I think we have inadvertently placed China in a
place of priority or predominance that they haven't quite
earned. I would note that Japan still has the second largest
economy in the world. We have other major trading partners in
Asia.
We have trading partners around the world who are more
closely aligned to the United States, share our values, share
our views, but yet, as was noted earlier, there has never been
anything like this in terms of high level engagement with any
of these countries, so I think inadvertently we have given the
impression that China has a place of priority, which I don't
think they quite frankly have earned through their actions and
through their policies.
I think that segues into a second concern I have. We often
place value differently on the outcomes of dialogues of this
nature. China often judges success or failure based on
symbolism, status. People say face in Asia. I think we run the
risk sometimes of loading six or seven Cabinet secretaries on a
plane, touching doing in Beijing, and the Chinese have already
accomplished their objectives in the meeting without having to
actually produce.
If they perceive they are already the great strategic
partner of the United States, my feeling and based on my
experience of interacting with China, that may actually
decrease the possibilities that they will engage in
constructive cooperation, and in fact there are a range of
things we can and should be doing with our allies that are not
only the right things to do with respect to those relationships
and for our United States interests, but also is the smart
thing to do in terms of engaging China.
I mentioned that it is a useful action forcing event, but
the reverse could also be true. China often holds in abeyance
initiatives and deliverables and outcomes until the next round
of a major dialogue, so I think there is a potential downside
of this diluting many of the other interactions we have; for
example, the so-called JCCT, the Joint Commission on Commerce
and Trade.
Another downfall and potential downside I would note is a
lack of priority and a very unwieldy agenda in the S&ED format.
I have noted what the representatives of the administration
have said about prioritization. I take them at their word. I
have a great deal of respect for both of them, but it is, very
frankly, hard to see from the outside that there were clear
U.S. priorities being conveyed in the S&ED. I think that that
has the potential to dilute the possibility of achieving
outcomes on what are truly the most important and strategic
issues for the United States.
Finally, I worry a little bit about a sense of complacency;
that we have so many ministers, so many Cabinet secretaries
that we will be under the impression we are talking to all the
right people and we have a vehicle that is sufficient for all
the work that needs to be done in the United States-China
relationship.
And in this regard it certainly underscores something Mr.
Podesta said about the military-to-military relationship. I
think if we could get PLA operators into a room to talk about
safety on the high seas, that in and of itself would be just
about equal value to what we are getting with all these Cabinet
secretaries and ministers.
I know my time is running very short. Let me just quickly
conclude with some recommendations. I don't want to only cast
aspersions. I think high level dialogue, senior dialogue, with
China is important. I think it can be improved.
Number one, I think we should step up our cooperation with
our allies. I think we should conclude CORUS, I think we should
enhance our TIFA talks with Taiwan, and I think we should
really take advantage of this fiftieth anniversary of the U.S.-
Japan alliance coming up for a robust security declaration.
Again, the right thing to do, but I think it actually helps us
to engage China.
Number two, I think we need much greater clarity on the
agenda for the S&ED so that we can really work on issues of
true priority and the number of Cabinet secretaries and
ministers adjusted accordingly if we are able to do that and
focus on a more concrete and specific agenda.
Again, number three, other fora. We shouldn't be complacent
about this S&ED as being all the right people, all the right
issues. I do think military-to-military is extremely important.
And then finally, I do think we have created an impression,
and I will only say that, that human rights is lower on the
agenda than I feel it should be with China. I take the
administration and Mr. Shear, again who I respect greatly. I
take him at his word about the vigor with which these issues
are pursued, but I did note China coming out of the S&ED almost
thanking the United States for not raising the Uighurs and
Xinjiang with greater intensity and forcefulness.
I don't take that as a good sign when we are being
congratulated for things like that, and so I think some things
should be done to re-energize those issues in the United
States-China relationship. Thank you.
[The prepared statement of Mr. Schriver follows:]
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Mr. Faleomavaega. Thank you very much, gentlemen.
The gentleman from California for his questions.
Mr. Rohrabacher. Thank you very much, Mr. Chairman. Let me
note in terms of a little comment on your original comment,
which was how China has had such stability, economic stability,
when there has been such economic chaos going on in the United
States and the western markets.
I think that if you live in a country where they have
killed the lawyers and jailed all the union organizers and cut
off all free press and political opposition, it would appear to
be a stable regime.
Mr. Faleomavaega. Will the gentleman yield?
Mr. Rohrabacher. And you could actually make sure the
profit is directed toward the right people. Yes, sir.
Mr. Faleomavaega. I think it was one of the great writers,
a fellow by the name of William Shakespeare, who said the first
thing we do is kill all the lawyers.
Mr. Rohrabacher. Well, the Chinese have certainly read that
one all right.
So let us note that that is the kind of society. There is a
facade of stability and strength, but I think that underneath
that is you have millions and millions of Chinese people who
long for the same things that we long for, and that is to be
able to live in freedom and to have better lives for our
children and to express ourselves and to be able to worship God
as they see fit.
I think these are not things that only westerners want. I
think that the Chinese people, I see them as our greatest ally,
and they right now have a boot on their face and it does not do
us any good or the world any good to ignore that fact and to
just talk about how we can cooperate with the guy who has the
boot on his foot and that boot is on the face of their own
people.
So with that said, let me ask a question because the first
two witnesses seemed very optimistic about cooperation. As a
matter of fact, your whole testimony was about how we cooperate
with this regime. Pardon me for being cynical here, but do
either one of your groups receive contributions or have clients
from business that are making profit from the China market?
Mr. Podesta. I will let Mr. Bergsten answer for his group.
We take small corporate contributions at the Center for
American Progress generally in the vicinity of $25,000, but
never for any work that we do, and so I think that we have no
economic stake in the people that----
Mr. Rohrabacher. By the way, $25,000 does not sound like a
small contribution to me.
Mr. Podesta. Well, we take contributions from corporations
as part----
Mr. Rohrabacher. But do you make a profit from China-to-
China trade? More than $5,000?
Mr. Podesta. You know, we do no work on their behalf and we
take no corporate contributions to do particular studies, Mr.
Rohrabacher.
Mr. Rohrabacher. Okay. I understand. You do take
contributions.
Mr. Podesta. We take union contributions. We take
individual contributions, and we take corporate contributions.
Mr. Rohrabacher. There it is. Okay. I am just asking.
People need to know who is talking. We have a group that takes
$25,000 contributions from people who are doing business with
gangster regimes.
Now, what about your organization?
Mr. Bergsten. About a third of our funding comes from
philanthropic foundations, about a third from individuals,
about a third from companies, some of which certainly have
business in China.
Mr. Rohrabacher. All right.
Mr. Bergsten. They of course have businesses in hundreds of
countries, and we take----
Mr. Rohrabacher. Sure.
Mr. Bergsten [continuing]. Funding for our China related
projects----
Mr. Rohrabacher. Okay.
Mr. Bergsten [continuing]. From companies that are involved
in----
Mr. Rohrabacher. And what size? We heard about $25,000 is
the biggest contribution from any business that does business
in China from his organization. What about the biggest
contribution from a company that does business in China for
your organization?
Mr. Bergsten. Well, we are much better fundraisers than
Podesta so we get more than that from some companies.
We get $10,000 from some, $5,000 from some. But I suspect--
I would have to check the record--we get $50,000 or more from a
couple of companies----
Mr. Rohrabacher. All right.
Mr. Bergsten [continuing]. That have business in China.
Mr. Rohrabacher. All right. So we understand, okay? No one
is saying that what you are saying is untrue or that you don't
believe it, but that is the environment in which you are
working.
So with that said, and again you are focused on
cooperation. I will have to say I am a little flabbergasted by
someone who would suggest that the United States be viewed in
the world as a partner with the world's worst human rights
abuser and that in some way is going to have a positive impact
with the G-2, but let me ask this question of you all.
Mr. Bergsten. Could I answer that directly?
Mr. Rohrabacher. Yes, you may. Go right ahead.
Mr. Bergsten. Because you raise a very fundamental
question. It comes up all the time in our debates on how to
organize the world. There are two conflicting schools of
thought.
One would say, and that is what I have said, that when
another country is the world's second largest economy, second
most important economy, and you can't really make progress on
any global economic issues without it. You have to deal with
them as effectively as you can.
Your view is that despite all that if their values are not
ones we share----
Mr. Rohrabacher. Yes.
Mr. Bergsten [continuing]. That you stay distant.
Mr. Rohrabacher. Right.
Mr. Bergsten. And I think one has to reconcile the two as
best one can, but one has to ultimately choose which way you
lean.
I think honest people can disagree, but I don't see how we
can promote our economic interests unless we deal effectively
and extensively with the world's second largest and most
important economy.
Mr. Rohrabacher. Well, as Mr. Schriver pointed out, Japan
for a long time was the world's second largest and we never
tried to afford them the type of prestige that you are
suggesting we move forward with China.
Mr. Bergsten. Not actually true, Mr. Rohrabacher.
Mr. Rohrabacher. Okay. Let me move forward with a couple
things here.
Mr. Bergsten. We were very close with Japan with many,
many----
Mr. Rohrabacher. Okay. Let me just note this. First of all,
I have heard from the business community for year after year
after year, for decades now, that if we just deal with these
people in a cooperative spirit and really treat them as friends
that there will be a liberalization going on.
I have not seen any liberalization going on in the Chinese
Government throughout this expansion of economic relationships,
and I believe that the hug-a-Nazi-make-a-liberal theory has not
worked. We have hugged them, we have kissed them, we have put
our investment money in their pockets, we have helped build
their economy, and they still have a fascist regime in Beijing.
One last question, and that is right now which do you
believe to be the worst threat to the stability and peace of
the world, the Somali pirates or China's claim to almost the
entire South China Sea?
Which one, the Somali pirates or this major massive power
laying claim to all of the trade routes through which Japan has
to bring all of its oil into almost all the entire South China
Sea? Do you think that claim is a belligerent, arrogant act on
the part of the Beijing?
Mr. Podesta. If you are forgiving the Somalia pirates, I
don't know why.
Mr. Rohrabacher. Okay.
Mr. Podesta. I mean, it seems to me that we need to deal
with both questions or both security issues, but, you know, you
see the world as black and white and I see it I guess in shades
of gray, Mr. Rohrabacher.
Mr. Rohrabacher. Okay.
Mr. Bergsten. I would like a few more choices. You just
gave two choices and which is the greatest threat.
Mr. Rohrabacher. Okay. What about for you, Mr. Schriver?
Mr. Bergsten. There are a number of countries,
incidentally, that claim portions of the South China Sea and
the Spratlys and all that----
Mr. Rohrabacher. Right.
Mr. Bergsten [continuing]. So it is not only China. It is
literally last count I think eight or 10 countries in Asia
that----
Mr. Rohrabacher. I will have to say, when the Philippines
go out there with their little putt-putt patrol boat and say
yes, we own this much of the South China Sea it doesn't seem as
threatening as when the Chinese claim the whole thing.
What about you, Mr. Schriver?
Mr. Schriver. Well, I wouldn't hesitate to say that China
represents the greatest potential threat to the United States.
It doesn't imply necessarily the full policy prescription
of what we do about it, nor does it say that there aren't
potential opportunities as well, but I think their trajectory,
we have to be very sober minded about that.
Mr. Rohrabacher. Thank you, Mr. Chairman.
Mr. Faleomavaega. Thank you. We are joined now by our
distinguished ranking member, the gentleman from Illinois, my
good friend, Mr. Manzullo. If he has an opening statement or a
series of questions he would like to----
Mr. Manzullo. I ask that my opening statement be made part
of the record.
Mr. Faleomavaega. Definitely. Without objection.
[The prepared statement of Mr. Manzullo follows:]
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Mr. Manzullo. You know, we have been working with China
ever since I came here in 1993. I served as the first chair of
the U.S.-China Interparliamentary Exchange, have been to China
several times, helped entertain the Chinese here in the United
States, and one of the impressions that I get it is very hard
to refer to the ``Chinese'' as one people just as it is hard to
refer to Bergsten and Podesta as people of like mind.
And I say that facetiously because depending upon the area
of China with which you are dealing or the individual we have
found some extraordinary open people that have really in
individual cases gone to bat for United States companies that
were getting clobbered by the Chinese themselves in various
parts of that country, so I find it----
I know we are still dealing with a country that is closed
and I am disappointed it is not more open than we anticipated
in light of the different laws that we have passed regarding
China's trade obligations, et cetera, but one of the things
that I want to explore with you, and this comes as a person who
also sits on the Financial Services Committee.
I am really concerned that the Chinese, which owe over $800
billion in U.S. notes, the first part of April at the G-20 had
talked about a bag of currencies, cache of currencies, whatever
it is, to supplant the U.S. dollar as a currency of reserve for
international trade purposes.
On April 2, the G-20 signed an extraordinary agreement that
sort of indicated that, and prior to that Secretary of Treasury
Geithner had made some remarks that perhaps he hadn't studied
talking about this substitute for the U.S. reserve. China now
of course wants more of a say so in the G-20 because they are
putting more money around the world.
My question to the three of you is what implications would
happen if the U.S. dollar no longer is the international
currency of reserve? That is an easy question. Who wants to
start with that? Fred?
Mr. Bergsten. Let me start. Sure. First of all, the Chinese
holdings of dollars are probably more like $1.5 trillion now,
almost double what you said. We can only record about $800
billion of their direct holding of U.S. Government paper, but
the estimated total is close to double that and rising very
rapidly, whatever they may say about their unhappiness about
dollars.
I made the point before that they have intervened massively
in the currency markets to keep their exchange rate undervalued
to improve their trading competitiveness. The way they do that
is to buy dollars. They buy dollars, sell renbinmi. It holds
the price of the renbinmi down against the dollar, gives them
more price competitiveness.
The financial consequence is their dollar reserves keep
rising so whatever anxieties they may enunciate they keep
piling up dollars more and more. So one can understand that
they want the best of all worlds. They want to be able to keep
their currency down, but also get some kind of takeout for the
dollars that they hold. I don't think they are likely to get
that.
I am not sure what you referred to in the G-20 in April,
but it may have been the decision to create a large amount of
special drawing rights at the IMF to supplement global
reserves. In an indirect way you might say or might interpret
that as a response to the anxiety of China and some other
countries incidentally--Russia and some others--about their
large dollar holdings, but I think the G-20 viewed that, and
rightly, as part of the response to the global crisis.
The idea of creating special drawing rights through the IMF
is to add to the reserves of all member countries around the
world. That gives them more wherewithal to buy imports, restore
the level of international trade, which has dropped so sharply,
and thereby contribute to the global economic recovery. It is
legitimate to say a side effect is to slightly decrease the
role of the dollar in world finance.
The SDRs up until now have accounted for something like 0.2
percent of all global financial reserves. The decision at
London--it has now been implemented, incidentally, August 28 by
the IMF--takes the SDR share of total reserves up to 5 percent
not by reducing the amount of dollars but simply by increasing
an alternative asset.
Now, what would happen if the dollar no longer becomes the
key reserve asset? First of all, that could not possibly happen
for a very, very long time. The dollar is the currency of
international commerce. It is used in variously estimated 70-80
percent of all international transactions, including by
countries far away from us geographically, so there is not much
risk that its role is going to diminish any time soon. There
just wouldn't be any technically feasible way to do that.
I may shock you, however, when I suggest that a gradual and
orderly reduction of the dollar's role might not be such a bad
thing for the United States. Why do I say that? First of all,
the dollar enables us to finance our huge trade deficits much
more easily. That is generally viewed as its main benefit. We
can live beyond our means. We can buy more from abroad than we
sell because the foreigners are willing to pile up dollars,
finance our debit card as if nobody was collecting on
principal, and so we can live beyond our means. In the short
run that is attractive.
But it also means that we often pursue policies that are
not greatly in our own interest, and I would submit that the
huge foreign financing of our huge trade deficits was an
important cause of the current crisis. Why? All those dollars
came in from China and elsewhere. They kept our interest rates
very low. They kept our monetary conditions very lax. They kept
our liquidity extremely high.
The Chinese did not force our banks to make stupid subprime
loans, but the conditions, the monetary conditions, that ensued
were an open invitation to overleveraging, underpricing of
risk, all the things that brought on the crisis. In short, the
great financing of our big deficits and all that wonderful
foreign capital inflow created conditions that really rose up
to bite us.
There is a second reason why it is not such a great thing
for the United States to have all this foreign dollar
financing, and my China example describes it. The Chinese
manipulate their exchange rate because they can buy dollars in
the currency market and keep their currency low. That
overvalues our currency, makes us less competitive in world
trade, brings on those big trade deficits and to some extent
job losses here. We don't control our own exchange rate because
of the international role of our currency.
So it is a mixed bag. I don't want to be totally negative.
There are advantages and disadvantages. It is a complicated
business. I wrote a book on it a long time ago. I have just
done a big article for the next Foreign Affairs issue
addressing that whole set of topics.
But I for one would believe that over time as we move into
a more multipolar world economy where the euro is rising as a
national currency, where the IMF can create this alternative
asset, it is probably a good thing for the United States to
have that greater variety.
The United States in fact was the country that initiated
the idea of special drawing rights in the IMF 40 years ago and
again strongly supported the G-20 action to create the $250
billion just in the last few weeks, and I think that is a
constructive course for U.S. policy.
Mr. Podesta. Mr. Chairman, could I just add one word to
that?
Mr. Faleomavaega. Please.
Mr. Podesta. I defer to Fred's expertise on this, but it
seems to me that he is laying out a solution that the
implication may be that the course should be to weaken the
dollar and weaken the reserve position of the U.S. dollar, and
it seems to me that the more effective way to approach this
problem is actually to get our macroeconomic policy right and
fix our own economy and retain the strength of the dollar as a
reserve asset by doing things like returning to fiscal
discipline and creating a macroeconomic policy that is going to
have wage growth happen in the United States so that the
pressure to kind of borrow our way into prosperity is reduced
as people's incomes rise.
Mr. Schriver. Well, I am not an economist, but as a China
watcher I would say that I think much of their actions and
statements are actually driven by insecurity. They never
invested in U.S. dollars and held U.S. dollars out of affinity
for us or love of us or because they wanted to be nice to the
United States. It is the best place for them to keep wealth and
hold wealth.
And they are nervous. They are nervous by our profligate
spending. They are nervous by the trajectory of things right
now, and I would completely agree that the best thing we can do
is return to fiscal discipline as soon as possible. Otherwise
this dynamic will surely continue.
Mr. Bergsten. Just to be clear, that is exactly the same
policy conclusion I come to and stress in the upcoming article,
but I do have a somewhat different view on whether the
international role of the dollar is a great thing for the
United States.
Mr. Manzullo. I appreciate your answers on all of those,
and as somebody who spends probably 60 percent of his time in
Congress working on manufacturing issues--I think I am the only
member who has gone to warehousing school--I am concerned over
the drift actually started with Chairman Greenspan, who never
thought the loss of manufacturing jobs was significant.
Fortunately, Chairman Bernanke takes the opposite view and is
concerned about every single job that we lose to a foreign
competitor and very sincere and very earnest in that.
I think it is a matter of how you look at this thing. Mr.
Podesta, I don't know how the United States can get its
macroeconomic house in order. I don't think we could sit down
and all agree to wear the same color tie on alternative
Wednesdays. Excuse me, Mr. Chairman. Or bolo ties or whatever
we are going to wear.
You know, you could take piecemeal what we see going on in
manufacturing in this country, and I see often times a company
will say either--a large company will tell a supplier either
you are going to knock out so much per dollar or we are going
to take it to China, and often times there is no supplier from
China. It is used as a paper dragon, if I could use that term.
Many of the suppliers say all right, if you want to buy that
thing from China, and then there is a pause and a hesitancy.
What I see going on is a lot of these jobs are going to
China. A lot of the price to the suppliers is being forced down
by the manufacturer who threatens that. I don't think you can
develop a macroeconomic policy when China is used both as a
source of manufacturing and as a threat of source of
manufacturing. I just don't see how we can overcome that except
to make U.S. manufacturing more competitive.
There are any number of ways that could be done through the
work we are doing on export controls and things of that nature,
but I had just asked for a comment. I didn't really ask for a
solution because I know none is here. I appreciate the comments
of each of the three of you.
Mr. Bergsten. Just to say very briefly, I very much agree.
The reason I have railed rather adamantly against China's
exchange rate policy is because it contributes very importantly
to the erosion of United States manufacturing and job base that
you indicated.
Certainly we have to do everything we can domestically in
terms of fiscal policy, as John said, and in terms of tax
policy to maintain a competitive base here for the
manufacturing sector and job creation.
Mr. Manzullo. If I could quote, when Madame Wu Yi was here
this was April 22, 2004, the U.S.-China Business Council--I
think, Fred, you were at that meeting--she made the most
extraordinary statement, so extraordinary I had to record it
forever in my Blackberry.
She said China has a ``market based managed unitary
floating exchange rate.'' I thought I had heard that wrong, and
then she had actually put out an English translation. Actually
she spoke in English. I said how could you have a market based
managed unitary floating exchange rate, but that is their
definition of their fair currency.
I thought you would enjoy that, Chairman. Do you like that?
Thank you.
Mr. Bergsten. It is a double oxymoron.
Mr. Manzullo. Well, whatever it is.
Mr. Faleomavaega. Unfortunately my good friend from
California has had to leave, but I wanted to just share with
him a little sense of my perspective about our relationship
with China.
China is not a perfect country, but neither is the United
States or any other country in the world for that matter. And I
say with a sense of a historical perspective, that at the
height of the Cold War we had a major adversary almost to the
brink of using nuclear annihilation if you will.
But something happened in 1972--to President Nixon's and
Mr. Kissinger's credit--to have a dialogue with the most
powerful Communist country, I guess the most populous at that
time. Mao Zedong and Zhou Enlai, literally changed not only the
balance of power in the world, but probably in my humble
opinion made a better world. The fact is that this historical
event in my humble opinion was due to China's willingness to
deal with us, a matter of power politics, if you will, but they
did.
They were willing to dialogue to the point where we
eventually established a formal diplomatic relationship. So I
wanted to share that with my friend from California, but maybe
next time.
Gentlemen, I know it has been a long afternoon and
certainly want to commend all three of you for your most
eloquent statements and opinions in terms of this very
important issue.
I just wanted to ask Dr. Bergsten. I think it was at one
time China wanted to propose an idea of an international
currency rather than using the dollar as the basis of all other
currencies. What do you think of that idea?
Their concern comes about because of what we have done in
terms of our own economic recession, which has literally
affected the entire world economy, including their own, I
suppose, as being worried about almost a $1 trillion investment
in the United States. Japan almost a $900 billion investment.
What do you think of the idea? Why don't we have an
international currency rather than just relying on the dollar
or other forms of currency?
Mr. Bergsten. The IMF currency that I mentioned before, the
special drawing rights are actually an international currency,
and, as I said, with the creation of a large new amount in the
last few weeks it has now become at least a modestly
significant component of monetary reserves held by national
governments.
However, there are no private markets in that currency.
When it was first created in the early 1970s there were in fact
some nascent efforts to create a private market, and it was
used to denominate some contracts and some bonds and things
like that, but it never caught on.
It could. It could become used in the private sector if
individual financial institutions and companies decided they
wanted to do so, and that would move us toward a more
internationalized monetary and economic system. As I said
before, I do not think that is likely.
The dollar has huge advantages of convenience. The United
States is by far, for all its recent problems, the deepest and
broadest financial market in the world, so right through the
crisis, countries and private actors around the world have
continued to build their dollar balances.
In fact, one of the most interesting and some would say
ironic elements of the crisis, which was of course initially
caused in the United States, was that the exchange rate of the
dollar strengthened very sharply throughout the crisis. Why was
that? In the depths of the problems and fears about economic
security and financial stability there was a flight to quality
and the safe haven of U.S. Treasury securities and the dollar.
Therefore, our interest rates went to virtually zero. Our
exchange rate strengthened. All that was a result of world
demand for dollars in the teeth of a crisis largely caused by
the United States.
Now, that does indicate that the dollar is not about to go
away any time soon as a global currency, but if one wanted to
move incrementally toward a bigger role for an international
asset, that move has already begun and could be elaborated.
Mr. Faleomavaega. Mr. Schriver, you indicated earlier that
you don't think China has earned her stripes of being in
standing with the United States not necessarily as a co-equal
economically, but substantively in any other way that it seems
to be.
Can you elaborate a little further by saying what does she
have to do to earn being a co-equal partner with the United
States that you seemed to have reservations about?
Mr. Schriver. Well, my own opinion is that it goes beyond
the size of the economy and the size of the population in terms
of how you interact with another country.
Undeniably, I wouldn't question anything that was said
earlier about the importance of working with China to deal with
the whole swath of global and regional issues. It is far easier
to get things done if China is on board and I daresay almost
impossible in some cases, depending on the issue, to get things
done if they are an adversary to you on those issues. But I do
think symbolism matters in international relations and I do
think tactics in terms of how you approach another country can
be consequential.
As I said in my testimony, I think elevating China to this
position before they have earned it, and I will add a thought
or two on that, actually can create the wrong kinds of
incentives or disincentives for them to cooperate
constructively because they do value that symbolism and that
status much more than other countries.
So I have always not pulling back on how we engage China,
but to ensure that our allies are properly positioned, we are
doing all the things like to create a United States free trade
agreement, TIFA talks with Taiwan, a robust security
declaration with Japan and so forth so that China understands
we still have close allies and valued allies and we are doing
things with them, in addition to what we are doing with China.
I would suggest actually, and maybe this is out of line
with other panelists and the administration, but I think the
cupboard is actually very bare on United States-China
cooperation if you want to really talk about meaningful
consequential outcomes.
And I know there is a range of issues people point to.
North Korea, for example. I think the cupboard is very bare
there. Proliferation, global climate change. I think we have
really yet to see truly constructive behavior from China and
constructive cooperation. On top of that, I think you have some
pretty irresponsible behavior in the international community,
and much of that was mentioned earlier, so what I am really
talking about is tactics and how to get the right kinds of
outcomes.
I am not suggesting we shouldn't be engaging in China at a
high level, nor am I suggesting it is unimportant to do so. It
is just, how do you get the outcomes you want?
Mr. Faleomavaega. Mr. Podesta?
Mr. Podesta. Well, I would probably come down someplace in
between Mr. Bergsten and Mr. Schriver. I think the G-2 is a bad
construction. I don't think the Chinese want that. I don't
think the United States wants it. Maybe it is a kind of glib
construction. I don't know, Fred.
But it seems to me that the relationship--we should not be
sending the signal to the rest of our partners that somehow
China and the United States are going to kind of control or
dominate the international architecture on either the economy,
security or the environment as we have talked about, but we
need China in all those relationships, in all those arenas, and
I think that the Strategic and Economic Dialogue opens the door
to strengthen that relationship, strengthen the partnership.
I think that a number of the potential outcomes have
already been mentioned. We have spent a lot of time thinking
through again the energy and climate aspect. If you take the
two countries together, there is more than 40 percent CO2
emissions globally from the United States and China.
If we both don't move forward, both independently but also
together, then I think the world faces tremendous challenges
again across all those dimensions: On the environment with
respect, but there is also an extreme security dimension to the
impacts, potential impacts of climate change, and obviously
there is tremendous economic impacts as well from severe storms
from the other consequences that have been well noted.
I think we need particularly in that arena, if you will, we
need cooperation for sure on the research and development side,
on the technology deployment side, but we also need diplomatic
cooperation to ensure that the world moves forward. I think the
same is true with respect to the security arrangements.
I actually think that particularly this year the Chinese
have actually been, and I say this from the perspective of not
just listening to what I have heard in the United States and in
Beijing, but actually what I heard in the DPRK. I think that
the Chinese have surprised to some extent the North Koreans in
the vigor with which they reacted to the missile launch and to
the nuclear test.
So I think they are an important player globally and we
need to strengthen our relationship, and clearly from the
economic perspective we could find ourselves in a very
unfortunate rapid delinkage I suppose in the near term, but
what we need to do I think is find a way forward that is going
to work for the United States fundamentally, and that is going
to require the Dialogue that I think you heard from the first
panel.
Mr. Faleomavaega. In fairness to the administration, the
first meeting was held in July, and I think in fairness to what
they are trying to do they are trying to sieve through what
exactly the issues that are relevant and important. And I
suppose the more we get the results of that dialogue that we
can probably make a better judgment of how this concept is
being taken by both countries.
But I do, as I am sure my colleagues will take a tremendous
interest in where the S&ED is taking us for the future. And I
kind of like to follow Dr. Bergsten's idea of being positive
and constructive, and I think this is what I believe honestly
in my dialogues with the leaders of China is their desire as
well.
I suppose it all comes down to one word, gentleman, and
that word is trust. Ideologically different, but I don't think
you will find the Chinese any different in terms of their
desire to have the same things that we want in life here in our
society.
You gentlemen have been so patient and so kind to give us
your precious time. I sincerely hope that this hearing has been
good for the public and especially for my colleagues. All your
statements have been made part of the record. Without
objection, if you wish to submit any additional materials to be
made part of the record, I would welcome it.
Gentlemen, I am sorry I don't have any Kalua pig to give
you for this afternoon, but maybe on another occasion. Thank
you so much for coming.
The hearing is adjourned.
[Whereupon, at 3:16 p.m., the subcommittee was adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
__________
Additional material submitted by the Honorable Eni F.H. Faleomavaega, a
Representative in Congress from American Samoa, and Chairman,
Subcommittee on Asia, the Pacific and the Global Environment
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
__________
Additional material submitted by Mr. Fred Bergsten, Director, Peterson
Institute for International Economics
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
|
NEWSLETTER
|
|
Join the GlobalSecurity.org mailing list
|
|
|
